Humala Replaces 10 Ministers After Mine Protests Shake Peru

Dec. 12 (Bloomberg) -- Peruvian President Ollanta Humala
swore in 10 new ministers led by a former army officer as he
seeks to take a firmer stance on protests that halted the
nation’s biggest investment project.

Humala named Oscar Valdes cabinet chief to replace Salomon
Lerner, who unexpectedly quit after the four-month-old
government declared a state of emergency Dec. 4 to suppress
protests against Newmont Mining Corp’s $4.8 billion Minas Conga
mine expansion. Lerner, a former businessman, led the
government’s unsuccessful bid to negotiate an end to a month of
sometimes violent marches by peasants against the gold and
copper project.

Some government allies including former President Alejandro
Toledo expressed concern that the appointment of Valdes, a
former army lieutenant colonel like Humala, could signal a shift
to an anti-democratic, hard-line approach to brewing social
unrest. While Humala’s commitment to pro-business policies looks
intact for now, investors should brace themselves for more
political uncertainty, said Kathryn Rooney Vera, an emerging
markets analyst at Bulltick Capital Markets in Miami.

“This is going to cause some volatility,” Rooney Vera
said in a phone interview. “Being one of the shortest-lived
cabinets in Peru’s history doesn’t help market confidence.”

Spread Widens

The extra yield investors demand to own Peruvian government
bonds instead of U.S. Treasuries rose three basis points, or
0.03 percentage point, to 213 at 9:47 a.m. in New York, matching
an increase in spreads in the region, according to JPMorgan
Chase & Co. Peru’s spread was 154 basis points a year ago.

The Lima General Index of stocks retreated 0.6 percent
compared with the MSCI EM Latin America Index’s 2.6 percent
drop. The sol weakened 0.2 percent to 2.70 per U.S. dollar,
according to Deutsche Bank AG’s local unit. The Bloomberg
JPMorgan Latin American Currency Index lost 1.2 percent.

Humala took office in July vowing to boost spending on the
third of Peruvians that live in poverty without jeopardizing $50
billion in mining investments expected over the next decade.
Lerner, a former trade negotiator and Humala’s campaign manager,
had been a key part of that strategy, convincing foreign mining
companies to go along with a windfall tax on profits approved by
Congress in September.

“This is a cabinet of managers and specialists that aims
to combine economic growth with social inclusion,” Valdes said
in an interview with Lima-based Panorama television after being
sworn in yesterday. Valdes said he’ll seek to impose discipline
in his 19-member cabinet, which he described as “more
coherent” than the last one.

Lerner gave few reasons for his abrupt departure. An early
backer of Humala, when the candidate was still shunned by most
investors for his past support of Venezuela’s Hugo Chavez, he
said in his resignation letter that his departure would allow
the government to begin “a new phase” and execute its policies
with a freer hand.

Mine Occupation

Humala in 2000 led 50 soldiers who seized and occupied for
a week a mine owned by Phoenix-based Southern Copper Corp. to
protest corruption in the government of then-President Alberto
Fujimori. He defeated then Congresswoman Keiko Fujimori in a
June runoff that Nobel Prize-winning novelist Mario Vargas Llosa
likened to the choice between two forms of terminal cancer,
given the authoritarian tendencies associated with Humala and
the decade-long rule of Fujimori’s father.

Valdes, 62, is also a former lieutenant colonel who taught
Humala at a Lima military academy. He turned to business after
leaving the army in 1991 and ran milk, flour and pasta companies
in Peru’s southern Tacna region, where he served as president of
the local chamber of commerce. He served as Humala’s Interior
Minister until yesterday’s reshuffle.

Valdes’ appointment suggests the government “will be less
willing to negotiate with rural communities, and quicker to use
authoritarian tactics to break up what is a growing number of
protests,” said Cesar Perez-Novoa, a managing director at
Celfin Capital in Santiago. A policy of less dialogue “may not
necessarily mean success,” he wrote a note to investors today.

Southern Copper, Anglo American Plc and Bear Creek Mining
Corp. have all suspended work on mining projects in the Peruvian
Andes as a result of demonstrations by farmers concerned that
their water supplies could be polluted. Denver-based Newmont,
the world’s largest gold producer, said it halted work at Minas
Conga to help the government re-establish peace.

Hurting Growth

The protests risk curtailing economic growth in the world’s
third-largest copper and sixth-largest gold producer by an
average 2.9 percentage points next year and in 2013, Bank of
America Corp. said in a Dec. 7 report. Mining accounts for about
18 percent of investment in Peru over the past 12 months,
compared with 5 percent three years ago, the bank said.

“It’s a more orderly, consensual and moderate cabinet,”
Maher Saba, co-portfolio manager at Compass Group Safi, said by
telephone from Lima. “The clearest indication that it’s a
moderate cabinet is finance minister Castilla. The fact he
stayed is hugely important.”

Peru’s economy, the sixth-largest in South America, is
expected to grow 6.7 percent this year before expansion slows to
between 5 percent and 6 percent in 2012, according to Castilla.
The economy grew 8.8 percent in 2010.

‘Fiscal Foundations’

“We’ve managed to maintain the fiscal foundations, which
is why the country is attractive to investors,” Castilla said
yesterday in an interview with Lima-based America Television.
“We have to stay on this path. There is significant inequality
that needs to be fought but we need foreign or domestic
investment to keep flowing to keep the economy growing, create
jobs and reduce poverty.”

Peru’s Lima General Index has fallen 15 percent this year
compared with an 18 percent drop in Brazil’s Bovespa index and
Colombia’s IGBC index.

Toledo, who allied himself with Humala during the election,
said yesterday he withdrew representatives of his Peru Posible
party from the cabinet, including Labor Minister Rudecindo Vega
and Defense Minister Daniel Mora, in protest at the
“militarization” of the government.

Strong Tactics

While Humala’s pro-business stance remains intact, he risks
losing support from members of his party that have expressed
support for the protesters, Bank of America said. Alvaro Vargas
Llosa, the son of the novelist, said he expects Humala to keep
using strong arm tactics if the protests resurface, even if that
risks boosting the role of the military and weakening civilian
institutions.

“Humala has been taken aback by the scale and strength of
the protests, so he wants order,” Vargas Llosa, who is a senior
fellow at the Independent Institute research organization in
Washington, said in an e-mail. “He has come to the conclusion
that only Valdes will give him that, and that people like
Lerner, who may have good intentions, cannot handle the
situation effectively through negotiations.”